money supply, banking & financial institutions section 8 MCQ Questions & Answers Detailed Explanation
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The following question based on Money Supply, Banking and Financial Institutions topic of indian economy mcq
- Angel investors generally invest their own money
- They invest in small start-ups and entrepreneurs
- They provide more favourable terms and conditions as compared to other lenders
- Angel investment is regulated by SEBI
(a) (iii) only
(b) (ii) & (iii) only
(c) (i) & (ii) only
(d) All of the above
The correct answers to the above question in:
Answer: (d)
An angel investor is a person who invests in highly risky companies, typically before those companies have any revenue or profits. Angel investors are often among an entrepreneur's family and friends and invest in small start-ups and entrepreneurs.
Angel investors provide more favourable terms compared to other lenders since they usually invest in the entrepreneur starting the business rather than the viability of the business.
Angel investors are focused on helping start-ups take their first steps, rather than the possible profit they may get from the business. Fund-raising with angel investors is typically done more casually, using networking and crowd funding platforms.
Essentially, angel investors are the opposite of venture capitalists. Angel investors typically use their own money, unlike venture capitalists who take care of pooled money from many other investors and place them in a strategically managed fund.
Angel Investment in India is regulated by the Securities and Exchange Board of India (SEBI) under Category I of Alternative Investment Funds (AIF).
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Read more money and supply banking financial institutions Based Indian Economy Questions and Answers
Question : 1
Consider the following statement regarding the concept of money:
- $M_1$: Money with the Public (currency notes and coins) + Demand deposits of banks (on current and saving bank accounts) + Other demand deposits with RBI. It is highly liquid and banks will not be able to run their lending programmes on this basis.
- $M_2: M_1$ + Saving bank deposits with Post-offices.
- $M_3: M_2$ + Term deposits with the bank.
- $M_4: M_3$ + All deposits of Post-offices.
a) 1, 2, 3
b) 1, 2, 3, 4
c) 1, 3, 4
d) 1, 2, 4
Answer »Answer: (d)
The four concepts of money used in calculating money supply are known as the money stock measures or measures of monetary aggregates.
These are M1, M2, M3, M4.
M3 = M1 + Term deposits with the bank.
Question : 2
Money can be created in the economy in which of the following ways?
- Full reserve banking
- Fractional reserve banking
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (a)
Banks are mandated to keep only a fraction of the deposits as reserves, the rest they can lend and this lending creates money in the system.
For example, If I had Rs. 100 cash with me which I deposited in a bank, and say the bank kept Rs. 20 in reserves and rest i.e. Rs. 80 it lent to someone else.
Now, the money with me is Rs. 100 (in deposit form) and money with the other person is Rs. 80. So, now total money in the system is Rs. 180, while earlier it was only Rs. 100. And this became possible just because the person depositing the money in the bank and the bank kept only a fraction in the reserve and the rest is lent to someone else. This is called fractional reserve banking.
In the above case monetary base is Rs. 100 and money supply is Rs. 180
Money multiplier = Money Supply/Monetary Base =180/100 = 1.8
In another case, if I would have only Rs. 50, which I deposited in the bank and the bank kept 20% reserves i.e. Rs. 10 and the rest Rs. 40 it lent then, Money multiplier = 90/50 = 1.8
If banks are mandated to keep all the deposited money i.e. Rs. 100 as reserves then banks would not have lent and no new money would have been created in the system. And then; the Money multiplier would have been = 100/100 = 1
For a detailed understanding, you can refer to the book on Indian Economy by Vivek Singh.
Question : 3
Which one of the following is a private bank?
a) Punjab and Sind Bank
b) Punjab National Bank
c) Punjab Bank
d) Allahabad Bank
Answer »Answer: (c)
Question : 4
Which of the following is not part of the money supply in the economy?
- Money lying with the government
- Deposits of commercial banks with other commercial banks
- Money lying with the Central bank
- Deposits of pubic with commercial banks
a) (ii) & (iv) only
b) (i) & (ii) only
c) (i) only
d) (i), (ii) & (iii) only
Answer »Answer: (d)
The money supply is defined as the stock of money in circulation among the public. So, money lying with the government, RBI and interbank deposits are not considered as money supply.
Question : 5
Bank rate is the rate of interest
a) at which Commerical Banks borrow money from RBI
b) at which Commerical Banks borrow money from public
c) at which public borrows money from Commercial Bank
d) at which public borrows money from RBI
Answer »Answer: (a)
Bank Rate is the interest rate at which a nation's central bank lends money to domestic banks. Managing the bank rate is a preferred method by which central banks can regulate the level of economic activity.
Question : 6
Consider the following statements:
- RBI can act as lender of last resort for banks and NBFCs both
- All NBFCs are registered with and regulated by RBI
a) (ii) only
b) Both (i) & (ii)
c) (i) only
d) Neither (i) nor (ii)
Answer »Answer: (c)
In all RBI related documents, it is written that RBI acts as a lender of last resort for banks.
But in the case of the IL&FS crisis in 2018, where it defaulted on loan papers, Mr Viraj Acharya, the ex-Deputy Governor of RBI clarified that RBI can act as lender of last resort for NBFCs also.
All NBFCs are not registered or regulated by RBI. Some NBFCs are regulated by SEBI, IRDAI etc. also
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